Chapter 4. Assessment and Estimation of Risk Preferences

This chapter surveys the rapidly growing literature in which risk preferences are measured and manipulated in laboratory and field experiments. The most commonly used measurement instruments are: an investment task for allocations between a safe and risky asset, a choice menu task for eliciting probability indifference points, and a pricing task for eliciting certainty equivalents of a lottery. These methods are compared in a manner that will help the practitioner decide which one to use, and how to deal with methodological issues associated with incentives, stakes, and the structure of choice menus. Applications involve using inferred risk preferences to document demographic effects, e.g. gender, and to explain the effects of risk aversion on observed behavior in economic in settings, e.g. bargaining, auctions, and contests. Some suggestions for evaluating the separate effects of utility curvature and probability weighting are provided.